This is the first opinion piece in a four-part series that explores the advent of bitcoin as a store of value and the implications of valuing the cryptocurrency in fiat. Read the first part here.
Exchange: the second bottleneck
How do you buy bitcoin?
Go to an exchange like conify, coinbase or gdax register a profile, pass the KYC (by verifying your identity) and connect your credit card or bank account to it. Because so many people entered the cryptocurrencies market in a short spam, some of these exchanges couldn’t cope with the amount of requests. So what happened? Massive delays in profiles verification, money transfers, bitcoin deposits & withdrawals. In a way, people couldn’t really buy bitcoin, which seems to be a huge problem with cryptocurrency in general: how you exchange fiat-currency for cryptocurrency. And this only gets worse: the exact same thing happened when you exchanged bitcoin for altcoins. As most cryptocurrency exchanges (bittrex, bitfinex or binance for example) aren’t accepting new user profile registrations.
What can we expect in the near future? Will it get easier?
Eventually yes, but don’t think it will be all fun and games. So far we’re still able to buy bitcoin through bank transfers and credit card payments. I’m sure this will eventually become increasingly difficult as new regulation arises (KYC and bitcoin bans were just the beginning).
Again, I’m not sure. Many tech developments might eventually facilitate payments and the exchange of fiat-currency for cryptocurrency. Potential solutions are:
- DEXs. Instead of relying on single centralized exchanges (yes, all traditional exchanges are centralized), what a decentralized exchange (or DEX) allows, is for people to exchange money instantaneously, peer-to-peer. In terms of security it’s incredibly safer to have information distributed among many peers, rather than “safely” stored in one single place.
Although this is quite helpful, how does it fix the second bottleneck: exchanging fiat-currency for bitcoin? Currently no mainstream DEXs has that capability. Any other options?
- Atomic swaps. The ability to instantly swap a coin for another without going through an exchange, can be a painless solution for this problem. Atomic swaps include fiat-currency to cryptocurrency. For this technology to work there are certain technical requirements that need to be met. For example cryptocurrencies must share the same hash algorithm, or the ability for users to interact with distributed ledgers via a browser. The only minor problem I see is that atomic swaps need huge market liquidity.
Buying cryptocurrency is still in its early stages. Hordes of people have already entered the market, but not quite enough for a massive change in currency adoption. I will discuss the Lightning Network, SegWit and other features that will enable easier bitcoin payments and incentive usage, during the scalability discussion (a current bitcoin hot-topic).
My macro view regarding future regulation is something like:
- If bitcoin is banned or it gets impossibly hard to get, people who own bitcoin will sell it in those places, as they can hike the price. People will be incentivized to enter the market due to high profits. So that won’t really work. (Yes, even if it’s illegal)
- If bitcoin is not banned, people will enter the market because of the price and currency properties.
Exchanges are currently a bottleneck but not a major one; for most technologies there is an initial centralization phase. Accepting the hypothesis that bitcoin will only rise in price, as long as
- the supply remains limited,
- more people join in,
- community and media hype continues
- and the expected new features get implemented,
I dare to ask the following questions:
- Would you prefer the price of your currency to depend on the network of users or on a central government?
- Would you prefer distributed consensus rules to be applied to your currency, that cannot be changed without majority approval (hence the BIP approach), or rules created and managed by a restrict group of people (only sometimes elected by democratic voting)?
- What’s best: own a currency accepted anywhere in the world, or a currency that needs to be exchanged to be used outside physical borders?
I’m sure there will come a time when currency will be detached from central institutions. As long as we have a distributed way of communicating value and a distributed way of storing consensus, the only purpose remaining for fiat-currency, I personally see fit, is to be exchanged into cryptocurrency. No more, no less.